Markets head back to 'normal' after Ukraine

This week’s trading has been mostly affected by the evolving situation in the Ukraine. Monday was a Ukraine risk premium on session while Tuesday and into this morning is a Ukraine risk premium off day. At least as far as the markets are concerned the Ukrainian situation is quickly moving into the background with values for most all financial and commodity instruments back to trading are pre-Ukrainian levels. The normal market drivers have quickly moved back into the forefront.

Today, high level diplomats from the United States and Russia will meet in Paris to discuss the situation in the Ukraine in an effort to ease the tensions as the U.S. and the west maintain the threat of economic sanctions. Putin and the west seemed to take one step back yesterday with Putin indicating that he did not see any immediate need to invade Ukraine while the U.S. made threats of economic sanctions but did not take any steps to implement any sanctions.

I expect diplomacy will prevail and eventually the tensions will be eased as some sort of UN or OSCE peacekeeping forces will replace Russian troops while the politics of Ukraine are sorted out. I do not expect any interruptions in energy supplies nor any direct impact on the global economy. For the moment my suggested view seems to be the direction this situation is heading in.

The main economic and oil demand growth engine of the world: China projected a growth rate of 7.5% this year according to Premier Li in a report to the country’s legislature released on Wednesday. This the same target growth rate as last year with the actual growth rate for 2013 exceeding the target by 0.2% at 7.7%. Normally China underestimates its projection with actual growth rates generally coming in above the target.

Most all of the oil demand growth projections for China are based on economic growth levels around the current China estimate. However, based on the economic data that has been released over the last few months the data suggests that China’s economy will continue to grow but certainly not at an accelerated pace and likely not much higher than the current estimates.

The spot WTI price is closing in on Friday’s settlement price or pre-Ukrainian level while the spot Brent contract is now solidly below Friday’s level. The result has been a another week of the April Brent/WTI spread narrowing as it slowly works its way toward more normal historical relationship. The spread is now within $0.30/bbl of testing the next key technical support level of around $5.50/bbl.

Last night the API reported another larger than expected draw in crude oil stocks from Cushing of 2.6 million barrels as the Keystone Gulf Coast pipeline continues to work its way toward its design capacity. The destocking of Cushing is continuing and accelerating and will continue to be bearish for the spread. I remain of the view that the spread will work its way back to pre-Cushing surplus trading levels as it did in the middle of July last year.

I am adding a new table that will be appear daily at the beginning of in the newsletter. This table compares the current values for the key energy commodities with the year to date average for this year as well as the annualized average value from 2013. As shown in the table WTI and RBOB are still trading above both the 2014 YTD average and the 2013 average while the rest of the oil complex is mixed versus 2013 and 2014.

The Brent/WTI spread is now trading well below the historical data shown in the report as is the LLS/WTI spread and the WTI Brent based distillate crack spreads while the RBOB crack spread is still wider than the YTD and 2013 average level. As the Brent/WTI spread continues to narrow crack spreads and thus refinery margins in the US will also normalize with the huge refining advantage in the PADD 2 region slowly to be more in line with the rest of the country.

Natural Gas is now trading below its year to date average but still well above this year’s average level as winter heating consumption has been well above normal for most of the season. Nat Gas prices have been struggling to mount another move to the upside as the winter heating season is staring to wind down.

Global equities are slowly regaining their footing as the Ukrainian situation starts to ease slightly. The EMI Global Equity Index is close to being unchanged for the week after a huge rally in US equities yesterday. Half of the bourses in the Index remain in positive territory for the year. Global equities have been a negative to neutral price driver for the oil complex so far for the week.

Wednesday's API report was neutral to mildly bearish as total crude oil stocks increased within the expectations while refined product inventories were mixed versus the expectations. The build in crude oil was mostly related to the improvement of the weather in the Houston Ship channel which resulted in an increased in crude oil imports. The API reported a larger draw in gasoline and a smaller draw in distillate fuel than what was expected. Total inventories of crude oil and refined products were about unchanged on the week.

The oil complex is mostly lower as of this writing and heading into the EIA oil inventory report to be released at 10:30 a.m. EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning.

Crude oil stocks increased by 1.2 million barrels. On the week gasoline stocks decreased by about 1.2 million barrels while distillate fuel stocks decreased by about 0.3 million barrels. Refinery utilization rates decreased by 0.5% suggesting the spring maintenance season may be starting to get underway.

The API reported Cushing crude oil stocks decreased strongly by 2.6 million barrels for the week. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is bearish for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil stocks as the restocking process continues for the seventh week in a row. I am also expecting a modest draw in gasoline inventories and in distillate fuel last week with refinery run rates starting to decline.

I am expecting crude oil stocks to increase by about 1.3 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 13.8 million barrels while the overhang versus the five-year average for the same week will come in around 11.5 million barrels.

I am expecting crude oil inventories in Cushing, Okla., to show the sixth weekly stock decrease in a row as the Keystone Gulf Coast pipeline is continuing to slowly ramp up its pumping rate. I would expect the Cushing stock decline to be in the range of 1.8 to 2 million barrels based on the fact that more oil was moved out of Cushing to the USGC on Keystone last week.

In fact Genscape reported that the Keystone Gulf Coast pipeline increased its pumping rate for the fourth week out of the last five weeks. Genscape reported a flow of 283,147 bpd as the line continues to work its way up to full operating capacity. The start of the Keystone Gulf Coast line is impacting the crude oil storage levels in Cushing and should result in Cushing stocks consistently declining going forward. Last week alone the Keystone line moved about 1.9 million barrels of crude oil out of Cushing. This will be bearish for the Brent/WTI spread this week. I am also expecting an above normal build of crude oil stocks in PADD 3(Gulf) of over 2 million barrels.

With refinery runs expected to decrease by 0.2% I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 0.5 million barrels which would result in the gasoline year over year surplus coming in around 1.6 million barrels while the surplus versus the five year average for the same week will come in around 2 million barrels.

Distillate inventories are projected to decrease by 1 million barrels as exports of distillate fuel out of the US Gulf continue while heating demand last week was mostly seasonal along the east coast. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 12.1 million barrels below last year while the deficit versus the five year average will come in around 31.9 million barrels.

The following table compares my projections for this week's report with the change in inventories for the same period last year. As you can see from the table last year's inventories are not in directional sync with the projections. Thus, if the actual data is in line with the projections there will only be modest changes in the year over year inventory comparisons for everything in the complex.

I am maintaining my oil view and bias at neutral but flying the caution flag as the situation in the Ukraine continues to unfold. Most of the commodities in the oil complex have breached their respective technical support levels and are staring to settle into new, lower trading ranges.

I am maintaining my Natural Gas view and bias at neutral as the market sentiment seems is shifting away from the winter weather trading mode. The Nat Gas market is exhibiting all of the signs of a market establishing yet another market top.

Markets are mostly lower heading into the US trading session as shown in the following table.